It was a good day for the market and the bulls were feeling much better after suffering through Tuesday's ugliness. Many of the optimists are ready to sound the all-clear signal, but in the bigger scheme of things we are still mired in a very large, volatile trading range. There is an effort to find some support at the 50% retrace level that I discussed yesterday, but the support levels out there are weak at best.
Unfortunately, this chaotic market action tends to create an oversupply of folks anxious to predict what is going to happen next. They may not have seen this action coming, but now they are dead certain about what is going to happen next.
Predicting what is going to happen does give people some sense of certainty, but it also robs you of flexibility when you will need it most. I have no idea how this market will play out from here. I think we could have some more upside and maybe fill the gaps that were created yesterday morning, but beyond that we could easily crash to the lows or run straight back up. I see no advantage in trying to guess.
Right now the market remains technically broken. Ironically, some of the best upside action occurs in downtrends, which is what we had today, but the risk of failed bounces is quite high. We finished today on a positive note, and with China closed tonight, there is a good chance of follow through. Enjoy the upside if you caught it, but there is no reason to be overly confident. The risk of another surprise drop is still quite high, but we may be fairly calm going into the Labor Day weekend.
Have a good evening. I'll see you tomorrow.
Sept. 2, 2015 | 1:00 PM EDT
Market Action Looks for an Opportunity
- · Weakness of today's bounce suggests more downside to come.
Today is one of those days where the action is generally positive but there isn't much opportunity. It is a good sign that yesterday's downside momentum fizzled out and so far we are staying in positive territory, but there isn't much to do if you sold into the opening strength.
If you are a buyer today, you are either looking for some quick flips or buying longer term for fundamental reasons. There simply aren't many favorable setups for swing and position trades. That isn't surprising after the breakdown, bounce and rollover action of the last two weeks. There simply isn't any reason yet to be optimistic that we have seen the lows. In fact, the weakness of the bounce so far today suggests we have more downside to come.
The good news is that the longer we can hold in positive territory, the better the chances of a late-day spike. There are concerns about margin selling, but if that doesn't take hold by the final hour, buyers are going to be looking for a late spike.
I'll be looking to play some index longs into the final hour if we are near the highs. With Chinese markets closed tonight, there is likely to be more willingness to carry some risk overnight.
Sept. 2, 2015 | 10:23 AM EDT
Upside Momentum Is Limited for Now
- · Individual stock-picking remains extremely challenging.
Market character has shifted quite a bit in the last few weeks. It has manifested itself in a variety of ways. One good example is that gap-up opens, like we have this morning, aren't producing much chasing. Instead, they have been opportunities for trapped bulls and aggressive bears to sell, and that is what they are doing.
We hit the highs on the opening tick and have not been able to gain any momentum so far. Breadth is still quite strong, at better than three to one positive, but very few stocks are trading at the highs of the day 30 minutes into the trading day.
Before the market opened, there was a collective sigh of relief and some anxiety about being underinvested, but that dissipated very quickly. The longer we stay under the opening highs, the greater will be the inclination to cut back and move to the sidelines. If we go red, the mood is going to turn very sour once again.
The bulls were hopeful that with the China markets closed for a couple days we might have some calmer action and some buying support, but there is still nervousness out there.
Individual stock-picking remains extremely challenging. We still have a couple momentum plays like Energy Focus (EFOI), but there are only a handful of stocks at new 12-month highs. You either focus on bounce plays or nothing. There are few good bases and no breakouts.
We'll see if we have some margin selling pressure, but right now it looks like a tepid day with limited upside momentum.
Sept. 2, 2015 | 07:14
This Chaotic Action Will Give Great Opportunities
- The correction would have happened sooner were it not for central banks.
"Wise are they who have learned these truths: Trouble is temporary. Time is tonic. Tribulation is a test tube."
--William Arthur Ward
After some major ugliness on Tuesday, we are looking at a bounce and some calmer action this morning. While it is a bit of relief to see some green on the screens in the very early going, this market has some major problems to overcome if it is to return to health.
At the moment we have standard breakdown action developing. On Aug. 20 we had the first major crack in the indices. That selling gained momentum over the three days before a big bounce gave the bulls some hope that the worst might be over. In view of how often we have had V-shaped recoveries, it wasn't unrealistic to think the market might continue to trend back up. On Monday, we faltered slightly, but not enough to cause any real concern. But then yesterday the selling picked up steam and we took out some important support around 1940 for the S&P500.
We are now in danger of retesting last week's low of S&P 1870. That seems almost too obvious to actually work, but it is the level that is the focus of chart readers right now. There is nothing in the charts that suggest that yesterday's selling has abruptly come to an end. The bounce we are seeing this morning is going to be very difficult to trust.
Overnight, things calmed down in Asia. There wasn't any big rally in China, but markets there are closed on Thursday and Friday for the World War Two Victory holiday and there is some hope that the break may help to calm things down. There certainly is no reason to think that China stocks have bottomed out, but at least some of the panic has dissipated.
So how do we deal with this market? As I discussed recently, this is not a market for stock picking. Stocks are moving around in tandem and there isn't much of an edge trying to find something that may buck the trend. When we have moves of this magnitude, there is little choice but to try to catch some of the momentum. You want to be in the right vehicle, but most indices and big caps are going to move pretty much the same. Small caps are just too risky and random when the indices are making these giant moves.
Many market players expend their energy trying to guess which way we will move next. There really isn't any way to be very certain how things will play out, despite the many pundits that claim to have superior insight. We could bounce right back or see a much deeper correction develop. Rather than try to predict, the best thing to do is to stay patient as events play out. There are opportunities to play bounces and rollovers, but trying to determine the exact moment the worst is over and we will trend back up is futile.
It is extremely important to have a game plan for dealing with this sort of volatility. There are long-term investors that will simply hold firm and ride it out. Trend traders have likely dumped most of their longs and are now focused on the short side. Short-term traders are playing the swings by buying dips and selling rips.
The key is to know your style and to know that we are dealing with a market that can change direction in the blink of an eye. If you aren't managing positions closely, you better be ready for your account to experience some major swings.
While the media loves to play up the idea that this is a major market crisis, the truth is that it is part of the normal cycle and is long overdue. Many traders find it refreshing to see the market go through some corrective action that probably would have occurred long ago if it wasn't for the constant meddling of central bankers.
The good news is that ultimately this chaotic action is going to give us some of the best new opportunities in many years. We simply have to navigate in a manner to protect capital and be patient as conditions develop. It is cause for celebration, rather than mourning.
We have a good-sized bounce setting up and it will be interesting to see how well it holds. There is opportunity, but the volatility and randomness will make it difficult.